Does Incorporating Always Protect My Personal Assets?

Does Incorporating Always Protect My Personal Assets?

Posted By
Mahir Nisar Attorney at Law

A key reason you might form a corporation or limited liability company
(LLC) is to protect your personal assets from any business debts. Under
New York law a corporation or LLC is treated as a separate “person”
from its owners. In general, that means a debt owed by the business is
not the personal responsibility of a shareholder or, in the case of an
LLC, a member.

But, this is not an absolute rule. New York courts may “disregard
the corporate form”--otherwise known as “piercing the corporate
veil”--in certain limited circumstances. In piercing the corporate
veil, a court may assign the corporation or LLC's liability to an
individual owner. This does not mean there is a separate debt owed by
the owner; rather, he or she is held personally responsible for a debt
owed by the business.

AZTE, Inc. v. Auto Collection, Inc.

Here is a recent example from a New York appeals court
decision. This was a fairly straightforward breach of contract case. The plaintiff
paid the defendants—a corporation and its principal shareholder—for
some merchandise. The defendants failed to deliver the merchandise. The
plaintiffs sued to recover their payments. Brooklyn Supreme Court, trying
the case without a jury, ruled for the plaintiffs and ordered damages
in excess of $500,000.

Of note here, the Supreme Court held the shareholder personally liable
for the business debt, thus piercing the corporate veil. The Appellate
Division, Second Department, upheld the Supreme Court's decision in
an opinion dated January 28th of this year. The Second Department held
the evidence produced at trial justified holding the shareholder liable.

The
New York Court of Appeals has established a two-part test for piercing the corporate veil. First,
the owners must exercise “complete domination of the corporation
in respect to the transaction attacked.” And, second, this domination
must have been “ used to commit a fraud or wrong against the plaintiff
which resulted in the plaintiff's injury.” In the present case,
the Second Department said the owner not only had “domination and
control” of the corporation in general—he owned 90% of the
outstanding shares—but he also controlled the specific transaction
at issue. The evidence further proved a fraud was committed against the
plaintiff because they paid for merchandise that was never received. Based
on all these factors, the Second Department said piercing the corporate
veil was an appropriate legal remedy.

Again, it's important to emphasize that piercing the corporate veil
does not create additional liability. The plaintiff does not recover a
higher damage award by adding the business owner as a defendant. The Second
Department's decision simply means the plaintiff may go after the
owner's personal property—as well as the corporation's assets—in
order to satisfy the judgment.

Protecting Your Business

Piercing the corporate veil is still an exception to the rule protecting
corporate owners from personal liability. But, it is important to understand
that limited liability protection is not an absolute. That is why when
dealing with any contract matter, you should engage an experienced
New York business attorney who can advise you on the best way to protect yourself from potential
litigation.
Contact our office right away if you would like to speak with an attorney.